One topic that comes up a lot around tax season is deductions and whether you should take the Standard Deduction or itemize your deductions.
In this post I explain what the Standard Deduction is and when you would rather itemize your deductions.
(You might also be interested in this Post: Our Year End Tax Planning Guide)
So, what is the Standard Deduction?
The Standard Deduction reduces taxable income.
It is a lump sum deduction that eliminates many taxpayers’ need to itemize deductions such as medical expenses, taxes, interest, and charitable contributions. The Standard Deduction is a simplification: rather than track all of these small deductions, you just take one standard deduction.
The Standard Deduction for 2021:
|Single or married filing separately||$12,500|
|Married filing jointly||$25,100|
|Head of household||$18,800|
If you are over 65 or blind, then there is an additional per person amount:
|Married no matter how you file||$1,350 per person|
|Single or head of household||$1,700 per person|
There is also an amount for dependents of the greater of $1,100 or earned income plus $350.
Itemized deductions are all of the deductions allowed in the tax code (which I go through below). You can either take itemized deductions or the Standard Deduction; you should generally take whichever is greater.
Some taxpayers may not take the Standard Deduction and must, therefore, itemize their deductions. The Standard Deduction is not allowed for:
- Spouses who are married but file separately, and the spouse itemizes deductions.
- A nonresident alien or a dual-status alien during the year.
You should sum up your itemized deductions and compare them to the Standard Deduction to see which is greater. Generally, taxpayers benefit from itemizing deductions if they:
- Cannot use the Standard Deduction.
- Had significant unreimbursed medical and dental expenses.
- Paid interest or taxes on a home.
- Had significant uninsured casualty or theft losses resulting from a presidentially declared disaster,
- Made significant charitable contributions.
Itemized deductions and limitations
There are several deductions that you can itemize. Here are the big ones, along with their limits:
Medical and dental expenses. You can deduct medical and dental expenses if they exceed 7.5% of your adjusted gross income (AGI). So if an individual earned 100,000, only those expenses over $7,000 would be deductible.
State and local income, property, and sales tax.
These are deductible up to $10,000. There is no deduction for foreign real property taxes.
Mortgage interest paid. Interest on a mortgage used to buy a house is deductible with limits. For debt incurred after December 15, 2017, the total allowable debt is $750,000; for debt incurred before December 16, 2017, the total allowable debt is $1,000,000. If your mortgage exceeds these limits, you will not deduct all of the interest you pay.
Charitable contributions. An individual’s charitable cash contributions are limited to 100% (2021) of AGI. You can carry over any amount over the limit for up to five years. There is an exception for payments to higher education institutions in exchange for the right to purchase tickets or seating at athletic events – these are NOT deductible. You don’t need receipts for donations under $250; for contributions over $250, you do.
Casualty and theft losses. A personal casualty or theft loss is deductible if the loss is attributed to a federally declared disaster.
Gambling losses. Gambling losses (cost of non-winning bingo, lottery, and raffle tickets, for example) are deductible only if you are also claiming gambling income.
Other itemizable deductions include:
- Amortizable premiums on taxable bonds.
- Casualty and theft losses from an income-producing property.
- Federal estate tax on income in respect of descendent.
- Impairment-related work expenses for persons with disabilities.
- Losses form Ponzi type (pyramid type) investment schemes.
- Repayments of more than $3,000 under a claim of right.
- Specific unrecovered investments in a pension.
Expenses not Deductible as Itemized Deductions
Several expenses have been deductible in the past or may seem like they should be deductible but are not. These include (though this not an exhaustive list):
- Unreimbursed employee business expenses.
- Tax preparation fees.
- Legal and accounting fees.
- Clerical help and office rent.
- Custodial (for example, trust account) fees.
- Investment expenses of a regulated investment company.
- Deduction for repayment under a claim of right if $3,000 or less.
- Investment expenses.
- Safe-deposit box fees.
- Political contributions.
- Legal expenses for personal matters.
- Lost or misplaced cash.
- Expenses for meals during work hours.
- The cost of entertaining friends.
- Commuting expenses.
- Travel expenses for employment away from home.
- Travel as a form of education.
- Expenses of attending a seminar, convention, or similar meeting.
- Club dues
- Fines and penalties.
- Expenses of producing tax-exempt income.
While these are not deductible personal expenses, many of them may be deductible as business expenses. So, if you incur these expenses as a part of a business venture, you may want to structure your activities so that you can reduce your business income before it becomes personal income.
We can help you sort this out.
If you are confused about whether to claim the standard deduction or itemized deductions, we can help; this is, after all, what we do!
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